Updated 10:19 am, Monday, June 19, 2017

WPX Energy, Delaware basin. Three drilling rigs on multi-well pads. L to R: Orion Drilling, Phoenix on the CBR 22-17H, Pegasus on the CBR 22-10H, Aries on the CBR 22-14H.

WPX Energy, Delaware basin. Three drilling rigs on multi-well pads. L to R: Orion Drilling, Phoenix on the CBR 22-17H, Pegasus on the CBR 22-10H, Aries on the CBR 22-14H.

Photo: Jim Blecha, Courtesy WPX

Investment capital flowing into midstream projects

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Billions in investment capital have flowed into the Permian Basin in the last year as the region’s oil and natural gas resources continue to draw the global spotlight.

Not all of that capital is destined to fund drilling holes in the ground, however. A sizable piece of that capital is finding its way into the midstream sector, developing infrastructure to move production to market. Blackstone Energy Partners, for example, is spending $2 billion to buy Midland-based EagleClaw Midstream Ventures.

“There is an inherent link between upstream activity and midstream investment that is very organic,” Sam Pitts, managing director, EnCap Flatrock Midstream, told the Reporter-Telegram by email.

“For every dollar spent by producers on the upstream we believe a corresponding 15 to 35 cents is required to take hydrocarbons from their natural state, condition them to a marketable state, and move them downstream,” said Pitts, who recently spoke at Hart Energy’s Midstream Texas conference at the Horseshoe Pavilion.

He said his company is augmenting the need for greenfield construction with merger and acquisition opportunities and identified opportunities on the demand end, developing terminals to serve the export market.

“With the uptick in drilling that has taken place since the rig count bottomed in the first half of 2016, we are seeing a broadening of the opportunity set beyond what had been an industry largely focused on the Permian and STACK regions,” he said.

Kelly Swan, spokesman for WPX Energy, doesn’t see investing in upstream or midstream assets as an either/or situation.

“But the business opportunity always starts with the rock,” he told the Reporter-Telegram by email. “You can see that from all the acreage acquired for over $30 billion over the past two years. Midstream is a critical piece of the puzzle, however.”

As the Delaware Basin in particular continues to unleash its riches, Swan said his Tulsa-based company has a “strong, very strong” outlook for its holdings in the region, expecting “our activity in this basin to be the catalyst for the future of the company.”

As a result, WPX has made what Swan called a strategic long-term move in forming a joint venture with Howard Energy Partners of San Antonio to jointly develop oil gathering and natural gas processing infrastructure in the Stateline area.

Swan said takeaway capacity from its Delaware Basin holdings is not currently an issue, “but could be later based on the sheer level of activity from all the players. We’re working hard right now to have everything in place for our expected growth in volumes.”

Brad Bynum, co-founder and present of Howard Energy Partners, told the Reporter-Telegram by email the agreement marks his company’s entrance into the Delaware Basin.

Swan said the strategic partnership is groundbreaking.

He cited comments from Rick Muncrief, WPX’s chairman, president and chief executive officer that the move is “a bold and innovative way to lay a well-defined path for our expected volumes and create an additional platform for generating shareholder value.

“Today’s agreement breaks new ground on both fronts. For starters, our forward-looking action gives our long-term Delaware development a competitive advantage. Second, we’re looking at the bigger picture and how to extend value creation beyond the drill bit by creating a premier Delaware midstream service provider.”

The joint venture with Howard, expected to close in the third quarter, will support WPX’s drilling operations in the Stateline area, which represents 50,000 net acres, or 37 percent of WPX’s approximate 135,000 net acre position in the Delaware.

It includes crude oil gathering assets already under construction as well as a planned natural gas processing complex that is expected to go into service in two phases in 2018 and 2019. WPX will retain all the natural gas and water systems that it acquired when it acquired RKI Exploration & Production in 2015, Swan said.

Under the agreement, it will be a 50-50 joint venture between the two companies. Howard Energy will complete construction of the assets and serve as operator. WPX already has installed approximately half of the planned 50-mile crude gathering system that initiated service in late 2016 and currently has 40 wells tied in, some of which are awaiting completion before starting deliveries into the system.

WPX will receive $300 million upfront from Howard, which will fund the first $263 million of capital expenditures, including a $132 million carry for WPX. The transaction values WPX’s Stateline oil gathering and gas processing projects at $863 million.

Bynum said his company has raised approximately $2.2 billion dollars over the last six years. Its diversified mix of financial partners — from publicly traded companies to investment firms, pension funds and sovereign wealth funds — “is a big differentiator from other midstream players,” he said.

Like Pitts and Swan, he sees upstream and midstream as part of the same value chain.

“There is currently a very deep pool of capital available for both E&P and midstream investment opportunities in the Permian Basin,” Bynum said. “Great drilling economics in the basin drive attractive financing opportunities across the value chain — for E&P, service and midstream companies.”